Alaska Air falls as Wall Street questions $1.9 billion Hawaiian deal

Alaska Air Group Inc. shares sank after it said it would acquire Hawaiian Holdings Inc. for $1.9 billion in cash and debt, in the latest attempt to consolidate the US aviation industry despite regulatory headwinds.

Alaska shares fell as much as 19% in New York on Monday. Shares of Hawaiian rose as high as $14.20, almost tripling after the deal’s announcement on Sunday but still below the $18 price Alaska agreed to pay. This suggested that investors remain concerned that the deal may not clear regulatory hurdles. 

The Biden administration has taken an aggressive stance on airline mergers, derailing one partnership between carriers and fighting JetBlue Airways Corp.’s $3.8 billion cash takeover of Spirit Airlines Inc. in court. The combined entity would capture more than 50% of Hawaii’s airline market, Alaska said in an investor presentation.

The chief executives of both airlines on Monday touted what they said were “pro-consumer” and “pro-competitive” outcomes of the proposed deal. Travelers in Honolulu, for example, would be able to reach three times as many destinations via their combined networks, while the tie-up would create a stronger competitor to the four largest domestic carriers that dominate the US market, Alaska Chief Executive Officer Ben Minicucci said in a CNBC interview.

“There’s really not a lot of overlap and the route networks are very complementary,” Hawaiian CEO Peter Ingram told CNBC. “When you take a look at it in the correct context, you’ll see that this is a deal that regulators should look at favorably.”

The deal, should it go through, could provide a valuable lifeline to Hawaiian, whose stock had tumbled more than 52% this year through Friday. The company has been hurt by the slow return of tourism between Asia and Hawaii following the pandemic, as well as fires which dampened visitor traffic in August. Hawaiian has also felt the impact from a ramp-up in growth in the Hawaii-to-mainland US market by Southwest Airlines Co. 

Alaska’s proposal values Hawaiian Holdings’ equity at about $1 billion, and includes about $900 million of debt. Alaska Air Group will be the parent holding company, headquartered in Seattle, with Alaska Airlines and Hawaiian Airlines continuing to operate under their separate brands.

Alaska is taking on the acquisition despite the Justice Department filing a record number of challenges last year to corporate combinations and a pending antitrust challenge to a separate airline deal. A federal antitrust lawsuit over JetBlue’s Spirit deal is nearing a close. 

“We believe the facts will prevail that this is pro-competitive and pro-consumers,” Alaska Chief Financial Officer Shane Tackett said in an interview. Alaska and Hawaiian Airlines overlap on 12 routes, or 3% of their total seats, he said. “They are very complementary businesses.”

Federal regulators earlier this year succeeded in breaking up an alliance in the northeastern US between JetBlue and American Airlines Group Inc., after a federal judge found the partnership gave the carriers too much power in certain markets and harmed consumers by raising fares and limiting choices. 

“There could be concerns in the Hawaii-Continental US market,” said Savanthi Syth, a Raymond James analyst. In a research note, she said the combination would change the market’s currently moderate concentration to “highly concentrated.”

The deal could “improve fares, though increase complexity by adding long-haul operations from Hawaii to US cities and into Asia,” Bloomberg Intelligence analysts George Ferguson and Francois Duflot wrote in a note. “Overlap appears to be limited, which improves odds of approval.” 

In the investor presentation, Alaska Air said that Hawaiian’s owned fleet of 26 aircraft was worth $560 million alone. Alaska will have to pay Hawaiian a termination fee of $100 million if the deal is blocked by a court or other governmental entity.

The $1.9 billion total price is “very manageable” financially, CFO Tackett said. “We feel very good about the price. We are getting a market leadership position in a really attractive premium market in Hawaiian.”

The Hawaiian market has annual revenue of $8 billion, he said, a large part of what convinced Alaska to approach Hawaiian leadership about a combination earlier this year. 

“We don’t believe this was an imperative for our business,” Tackett said. “What we saw was an opportunity to gain a second hub in Honolulu” that ultimately could approach Seattle in annual revenue production. 

Hawaiian was facing a massive looming maturity on $1.2 billion of secured notes due 2026, which traded in distressed territory as the carrier faced increased competition and reduced demand after the wildfires. Those bonds shot up to the highest price since August after the merger was announced, trading near 94 cents on the dollar, according to Trace data.

Alaska has a strong balance sheet and will likely retire Hawaiian’s debt, said George Ferguson, senior aerospace airline analyst at Bloomberg Intelligence.

“If you’re a Hawaiian creditor, this is a great day for you,” he said. “You traded Hawaiian risk for Alaska risk.”

The acquisition has been approved by the boards of both airlines and still requires approval from Hawaiian Holdings shareholders and regulators. It’s expected to close in 12 to 18 months, the carriers said.